Dear Debt Adviser,
I have a low-interest first mortgage, but a large-interest second mortgage. We want to keep the home and can make the first mortgage payment. What can we do with the second?

I was told that if we stop paying the second, the lien holder would have to close on the first to be able to recoup losses. Do you think the lien holder would be open to allowing us a one-year reprieve while putting the interest on the back end of the loan until our income comes back in line with the market?

It appears that with all the foreclosures, and few buyers, lenders would be willing to work with homeowners.
— Del

Dear Debt Adviser,
Should I “short sale” my house and then have to pay the tax consequences — on approximately $50,000 — or should I let the house go into foreclosure?

I am thinking a short sale will only give me more debt to the government, and I still have bad credit. With a foreclosure, I can at least walk away from tax burden and still have bad credit. Any advice is badly needed.
— J.

Dear Del and J.,
I wanted to answer both of your questions in this week’s column because so many people are currently facing similar situations. Hundreds of thousands of people are dealing with deflated home prices, loss of equity, uncertain employment and the credit crunch.

The last thing you need is misinformation from well-meaning nonprofessionals. So hopefully, I can offer some clarifications.

First, in the case of most primary residences, you don’t need to worry about a tax consequence for a short sale or foreclosure on your home, if that is the best course of action for you.

The Mortgage Forgiveness Debt Relief Act of 2007 protects homeowners from paying taxes on mortgage debt that has been forgiven. It expires in 2010. File IRS Form 982 for an exemption.

Also, please don’t stop paying on your second mortgage in hopes of then working out a solution. I don’t know who told you to do that, but I wouldn’t advise it. You will have more options available if you are not behind or in foreclosure as you try to get help.

The notion of lenders seeing the light and working with borrowers is not as obvious as you would think. Some lenders, like HSBC, have bent over backward to help. Others have done nothing, claiming they can’t help you because of agreements with those invested in the marketable security containing your mortgage.

Thankfully, more lenders are becoming helpful. However, others remain morally (and, I hope, soon to be financially) bankrupt. They hide behind documents that could be changed if they cared enough to spend the time and resources to take action.

If it was their company in debt, you can be darned sure they’d be working out new terms for themselves — or flying to Washington in private jets to ask for your money.

I recommend each of you seek advice from a professional counselor. A counselor can help you determine which actions are possible while helping you state your case forcefully. A qualified housing counseling organization can find assistance for which you qualify. These organizations do this every day, and you don’t. So, call one today.

Bank of America, JPMorgan Chase, Fannie Mae and Freddie Mac are all expected to offer new homeowner assistance programs in the next few weeks. In addition, Fannie and Freddie have announced a freeze on foreclosures for the holiday season. This began on Nov. 26 and will continue until Jan. 9.

Apparently, the Washington bureaucrats don’t want to put families out on the street during the season of giving. It would be even nicer if they extended the deadline until after the presidential inauguration on Jan. 20, when our new president may sign new legislation that can help homeowners.

Finally, you can find an organization to help at the Hope Now Web site or by calling 1-888-995-HOPE (4673). You can also find a HUD-approved housing counseling agency at the HUD Web site.

Here are some final things to keep in mind when seeking help:

  • Communicate with your lender early and frequently. Follow up in writing. Take action before you are late if possible, but certainly before your mortgage is 90 days late.
  • If the lender is not helpful, contact a housing counselor. If a counselor can’t help, contact an attorney.

There are many options out there. Be sure to get qualified help instead of listening to well-meaning amateurs.